Who Cares About Inequality?

Posted by Andrew Leigh MP5sc on September 26, 2012

In today's AFR, I have a column on why inequality matters.

Take the test, which society do you prefer? Australian Financial Review, 26 September 2012

To see whether you care about inequality, take this simple test. Suppose you had an equal chance of being born into any of the five wealth quintiles in Australia. Would you prefer to be born into a society where the share of wealth held by each of the quintiles was 1%, 6%, 12%, 20% and 62%? Or a society where the shares were 15%, 17%, 20% 24% and 24%?

Actually, I’m cheating, because I already know the answer. The first set of numbers is the actual distribution of wealth in Australia: 1% for the poor and 62% for the rich. But when surveyed about their ideal distribution of wealth, respondents almost universally want a more egalitarian distribution. Indeed, the figures I’ve shown are the wealth distribution preferences of the most affluent, who thought that the poor should have 15% of wealth, and the rich 24%.

So while I enjoyed Christopher Joye’s thoughtful column on inequality (AFR, 25/9), his view that we need a wider gap between rich and poor is definitely a boutique one. Asked to choose between the level of inequality in Australia and the United States, the vast majority of survey respondents opt for the Australian level.

As Treasurer Wayne Swan might put it, being Born in the USA seems appealing for those who get to drive a Pink Cadillac, but things look different for those in the Badlands and Backstreets. There is much to admire in the way that the US fosters great entrepreneurs like Elon Musk, Marissa Mayer and Sergey Brin; but we must remember that the US is also the country that jails two-thirds of black high school dropouts, and where life expectancy for low-educated white women has fallen by five years over the past two decades. Inequality may not cause these bad outcomes, but the fact is the US is a dreadful place to be destitute.

Christopher Joye asks why we have progressive income taxes when we don’t handicap sportspeople. A glib answer is that Australian sport is replete with handicapping, from the different weight saddlebags in the Melbourne Cup to the salary caps that characterise most of our sporting contests. As many English soccer fans can tell you, too much inequality makes for a dull sport.

In the case of progressive income taxes, we ask the rich to pay a higher share of their incomes in taxes because they have more discretionary income than the poor. Put another way, the richer you are, the more capacity you have to fund our schools, army, hospitals, and pensions. And while it is true that higher-income people like Joye and me are lighter users of the income support system, we tend to be heavier users of other public services, including universities, roads and airports.

The flipside of progressive taxes is that government cash payments should be means-tested. I’m agnostic about whether $250,000 classifies you as ‘rich’, but I’m pretty sure that it means you don’t need to be on welfare. And yet when our government has imposed means-tests on household payments and tax breaks, we heard an outcry from the Opposition (a reminder that they’re the heirs to those who opposed asset-testing the pension in the mid-1980s).

Australia is fortunate to have less inequality than many other nations, and to have seen a small drop in inequality over recent years. But the gap between rich and poor has grown markedly since 1980, with the top 1 percent doubling its share, and the top 0.1 percent tripling its share. And yes, inequality boosts growth, but it trickles down slowly.

Surveys prove that Australians care about inequality, and a plethora of economic experiments have shown that people are willing to pay to narrow the gaps between the rich and the rest. I can understand why Joye disapproves of envy, but as an economist, I’m surprised he would dismiss it as ‘irrational’. What brings us happiness isn’t just our own incomes, but also the wellbeing of others. Some people might find envy distasteful, but it’s no more irrational than altruism.

As ACTU researcher Matt Cowgill has pointed out, we should be sceptical of those who argue that it’s possible to worry about poverty but ignore inequality. What we define as a reasonable standard of living is invariably based on the wellbeing of the typical household. Someone who says they don’t care about inequality isn’t just saying that we shouldn’t worry about those at the front of the pack – they’re also saying that we needn’t worry how far the most disadvantaged have fallen behind.

Andrew Leigh is the federal member for Fraser, and a former professor of economics at the Australian National University. He is currently writing a book about inequality.